Article No. 200

Customer Psychology Findings, by James Larsen, Ph.D.

The Shifting Sands of Customer Preferences

Research reveals yet another principle to guide business owners.

Customer preferences will drive you mad. Just when you think you've got customers figured out, they'll change their preferences completely and leave you with inventory to collect dust. It happens all the time. Consider an example from Marketing 101:

Marketing professors have taught manufacturers and retailers the "regularity assumption" for years. It's a simple idea which claims that adding a second brand of a product line will not increase the market share of the first brand. Acting on this assumption, retailers get pressure from manufacturers to limit the number of brands of a given product that they will carry.

The regularity assumption applies to any choice situation, so, for example, a competing business moving next door would be expected to reduce your market share, too.

Christopher Hsee, from the University of Chicago, recently performed six experiments which demonstrated that consumers consistently violate this regularity assumption. In fact, his work has led to a new principle involving customer preferences, but Hsee hasn't yet given it a catchy name.

Professor Hsee created two pairings of consumer products and compared customers' responses. In the first pairing, two brands of the same product were offered side-by-side in a retail setting, and customer response was compared to the same choice when each brand was presented separately. This pairing examined how customers reacted when both brands were well above average in quality, features, and price.

Next, he repeated the experiment, but he substituted low quality brands, that is, brands with quality, features, and prices that were well below the industry average.

For the high quality brands, Hsee found that customer response was better when they were presented separately in different stores. For the low quality brands, he found that customer response was better when they were presented together, side-by-side in the same store.

So the new principle for the regularity assumption is that it's only true for upscale items. It's completely wrong for bargain products.

Why do you suppose this is true? Professor Hsee speculated:

If the options and features of upscale brands are already attractive compared to the industry average, then comparing two competing brands in a side-by-side display will highlight the weaknesses of each alternative compared to the other. This comparison of weaknesses will make both brands less attractive.

If the options and features of economy brands are already unattractive compared to the industry average, then comparing two competing brands in a side-by-side display will call attention to advantages of each alternative compared to the other. This comparison of advantages will make both brands more attractive.

Professor Hsee hastens to remind us that applying this new principle will impact many more decisions than merely how many brands of coffeemakers to stock. Car dealerships, for example, often offer multiple brands. For economy lines, the presence of several below average alternatives will enhance their attractiveness and improve the sales of all brands. For luxury models, the reverse is true, and they should be presented separately.

The placement of advertising and the composition of catalogues will also be impacted by this new finding: upscale brands should run separately, bargain brands, side-by-side.

Finally, you might look around the neighborhood and see who's in business nearby. Put yourself in the choice situation of a customer approaching your business who is forming an impression of attractiveness. If your business is upscale, and other upscale competitors are nearby, you should do better in a different location. In the reverse situation, similar neighbors will help your business. Perhaps this is why fast-food restaurants tend to bunch together, yet they seem to do a thriving business.